A unique financial opportunity is catching attention as investors try to boost their income potential while keeping volatility in check. Meet the interval fund. These funds, unlike typical exchange-traded funds, include private credit and other income-focused assets that are less readily available on the market. Due to the nature of their investments, interval funds are not available for sale at just any time. Instead, they offer specific windows for liquidity, usually through quarterly share repurchases. They can also employ leverage to increase potential income, fetching yields between 9% and 11%, as Brian Moriarty from Morningstar highlights.
Recently, people have started to see these funds as an ideal gateway to private credit and other exclusive financial instruments for everyday investors—those who usually can’t access such opportunities. Generally, you’d need to be an accredited investor to enter the private credit space, meaning your net worth must exceed $1 million, excluding your home, and you should have an income over $200,000 individually or $300,000 with a spouse in the past two years.
Asset managers are working towards making private credit more accessible. For instance, State Street and Apollo Global Management have recently rolled out a new ETF, PRIV, focusing on both public and private credit. Similarly, Capital Group and KKR are moving forward with plans to launch two new interval funds, having filed with the U.S. Securities and Exchange Commission.
Holding out for less frequent liquidity via interval funds rather than regular ETF liquidity might earn investors a premium. Matthew Bass of AllianceBernstein, which offers the AB CarVal Credit Opportunities Fund, sees private credit as a method for achieving additional income that’s beyond what public markets can offer. Their new fund, ABAYX, recently launched with a 7.29% yield but comes with a 1.98% adjusted net expense ratio.
Financial advisors are also turning towards these funds to provide their clients with exposure to less-liquid markets more efficiently. For instance, Franklin Templeton’s Franklin BSP Private Credit Fund, started in 2022, boasts a 7.89% distribution rate, though it carries a 4.78% net expense ratio. Advisors see interval funds as a viable option for clients focused on income, provided they have other assets to address immediate liquidity needs.
However, it’s important to consider the commitment involved. As Thomas Balcom from 1650 Wealth Management puts it, though many consider themselves long-term investors, life events like a job loss or divorce can change that. It’s crucial to ensure clients are cognizant of these funds’ limited liquidity.
With more interval funds coming into play, due diligence is essential. Ben Loughery of Lock Wealth Management advises investors to thoroughly assess whether their situation allows for a long-term commitment. Fees in these funds can be high when compared to ETFs and mutual funds. A study led by Moriarty in 2024 found interval funds have an average expense ratio of 2.49%, far above the 0.58% typical for ETFs.
Ultimately, understanding the finer details of what you’re buying into is vital. Decisions shouldn’t be made hastily, as you’re committed to these investments for at least a quarter.
